Neurocrine Biosciences, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The company develops neurological and endocrine disorder drug candidates and had no product sales. Revenue came from collaborations and research funding.
Financial performance
| Metric | Q2 2011 | Q2 2010 | H1 2011 | H1 2010 |
|---|---|---|---|---|
| Revenue | $12.2 | $4.6 | $24.7 | $5.4 |
| Operating expenses | $11.1 | $10.5 | $21.6 | $21.5 |
| Operating income (loss) | $1.1 | $(5.9) | $3.0 | $(16.1) |
| Net income (loss) | $2.0 | $(5.2) | $4.9 | $(13.8) |
| Basic and diluted EPS | $0.04 | $(0.09) | $0.09 | $(0.27) |
- Revenue increased sharply year over year, primarily from recognition of Abbott and Boehringer Ingelheim collaboration payments. Abbott contributed $9.8 million in Q2 and $19.9 million in H1; Boehringer Ingelheim contributed $1.7 million and $3.3 million, respectively.
- Operating margin was approximately 9% in Q2 and 12% in H1 2011, compared with operating losses in the 2010 periods. These results reflect collaboration revenue recognition, not product sales.
- R&D expense was $8.2 million in Q2 and $15.5 million in H1, up from $7.3 million and $14.9 million. Management cited scientific consulting/advisory work, laboratory costs, higher personnel costs and continued VMAT2 development; elagolix external costs declined as work transitioned to Abbott. G&A declined to $2.8 million in Q2 and $6.0 million in H1.
- H1 operating cash flow was negative $14.5 million, versus positive $53.3 million in H1 2010, when the company received Abbott’s $75 million upfront payment. Investing cash outflow was $20.9 million; financing provided $0.2 million. Cash and cash equivalents fell to $18.8 million from $54.1 million.
- Cash, cash equivalents and investments totaled $115.2 million at June 30, 2011, versus $130.6 million at year-end 2010. Restricted cash was an additional $6.1 million. Total assets were $127.4 million, liabilities $101.8 million and stockholders’ equity $25.6 million. No borrowing balance is presented; the company had significant lease-related obligations and deferred revenues.
Material changes and business developments
- Abbott’s $75 million upfront payment is being recognized over the expected joint development committee term through 2012. Abbott deferred revenue was $43.5 million at June 30, 2011. The agreement includes up to approximately $530 million in additional development, regulatory and commercial milestones, up to approximately $24 million in personnel funding through 2012, and potential sales-based payments.
- Boehringer Ingelheim’s $10 million upfront payment is being recognized over the expected steering committee term through June 2012; deferred license fees were $4.8 million. The agreement provides for up to approximately $3 million in preclinical milestones and $223 million in clinical and commercial milestones. No milestones were recognized in the periods presented.
- The company reported 11 programs in research and development, including six in clinical development. Elagolix, its lead clinical program for endometriosis, is partnered with Abbott; VMAT2 remained in Phase II development.
- At June 30, the company reported an accumulated deficit of $757.4 million. H1 earnings included $1.5 million of deferred real-estate gain recognition; this is not product revenue.
Outlook, risks and contingencies
- Management said existing resources, investment income and expected strategic-alliance payments should fund current projected requirements for at least 12 months, but may not fund all planned research and development. The company may seek additional equity, collaboration or other financing; equity issuance could dilute shareholders.
- The filing states the company expected to be profitable for full-year 2011, while also expecting negative operating cash flow in 2011 and after, and not expecting to remain profitable after 2011. It reported no product revenue and expected operating cash flow losses for the foreseeable future.
- Clinical and regulatory outcomes are uncertain. The filing identifies potential delays or failures in trials, approvals and commercialization; it also reports that a Phase II study of CRF1 antagonist 561679 in major depression showed no benefit versus placebo. The company cautioned that GnRH program timelines could be delayed.
- Collaborators may control development decisions and may terminate agreements. Abbott and Boehringer Ingelheim have termination rights; loss or delay of collaborators could impair funding and development.
- The company must maintain $50 million in cash and investments under its headquarters lease or increase the security deposit by $5 million. A $6.3 million bank deposit secures a $5.7 million letter of credit. Interest-rate sensitivity was assessed as not material for a 10% rate change.
- Management reported disclosure controls and procedures were effective as of quarter-end and no material change in internal control over financial reporting during the quarter. No material changes to the previously disclosed risk factors were reported, apart from identified revisions.
Important facts for investors to verify
- Whether collaboration revenue recognition and expected partner funding continue as planned, and the timing and terms of any milestone payments.
- Clinical progress, safety and efficacy results, and regulatory timelines for elagolix, VMAT2 and other programs, including risks highlighted for 561679 and the GnRH program.
- Cash burn, liquid resources, lease-related cash commitments and compliance with the $50 million lease liquidity requirement.
- Whether the stated 2011 profitability expectation is achieved and how much of reported earnings reflects deferred collaboration fees or other non-product items.
- Potential dilution and financing availability under the $125 million shelf registration and the Kingsbridge equity facility; no CEFF shares had been issued by June 30, 2011.